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how does the European Union carbon emissions trading scheme work the greenhouse gases present in the atmosphere help keep the earth at an average temperature of 15 degrees Celsius without this greenhouse effect the world's average temperature would be minus 18 degrees Celsius since the Industrial Revolution large amounts of greenhouse gases are released into the atmosphere as a byproduct of human activities they're rising concentration in the atmosphere leads to an increase in the average global temperature which in turn disrupts our climate in 2005 to limit the emission of greenhouse gases the European Union decided to introduce the first multi-state carbon market in 2015 this has become the largest emissions trading scheme in the world how does the European carbon market work first the European Commission defines an emissions cap for a certain time period this cap is then divided and shared between the different market players in the form of tradable allowances each allowance represents the right for an industrial plant to emit one tonne of co2 equivalent at the end of each period plants must demonstrate a balance in their allowances and their emissions they then have four months to return the corresponding allowances to the market authorities for example let's consider two companies which issued 100 allowances each corresponding to an emission volume of 100 tons of co2 equivalent if at the end of the year company a has emitted 120 tons of co2 equivalent it will have four months to buy the excess allowances from the market or it may purchase offset credits the latter represents emission reductions achieved by other Geographic zones or in other sectors beyond the four-month period if the company is not in compliance it will have to pay a fine and provide the missing allowances conversely if Company B only emits 80 tons of co2 equivalent it can bank the excess 20 tons for use in future years or sell them to other companies the European carbon market covers almost 50 percent of European co2 emissions and includes almost sixteen thousand four hundred of the most polluting production facilities in the energy and industrial sectors by 2020 the target is to reduce greenhouse gas emissions by 21 percent compared to 2005 and by 43 percent by 2030 this will be achieved by setting an emissions cap which will be lowered each year until 2030 how does the carbon price influence the business strategy of companies setting a carbon price is meant to help incentivize companies to reduce their co2 equivalent emissions the company must decide what is the most economical option in the long term should it compensate for its emissions by buying allowances or should it invest in low-carbon technologies now if a company anticipates that the price of carbon will be lower than the cost of reducing its greenhouse gas emissions through technology then it will most likely prefer to buy allowances or offset credits if the opposite is true it will prefer to invest immediately in energy-efficient technologies or in renewable energies or both that is how the carbon market supports the development of clean technologies on the condition that it has a strong carbon price in the long term